Chi-X Japan woos brokers with hosted risk controls

Proprietary trading system Chi-X Japan has introduced hosted risk controls, which it says will offer cost advantages to brokers and latency-sensitive traders by removing the need to have their own systems.

Proprietary trading system (PTS) Chi-X Japan has introduced
hosted risk controls, which it says will offer cost advantages to brokers and latency-sensitive
traders by removing the need to have their own systems.

Brokers that wish to use the risk control services will be required to purchase a server at
the venue’s data centre. Chi-X Japan will then host the server at the firm’s
co-location area and install the necessary FIX gateway, complete with the risk
controls. The brokers also receive a real-time data feed, enabling them to keep
track of their risk.

“This is designed for latency-sensitive participants and
brokers who want to offer low-latency access to our venue, without
compromising any risk controls,” said Samson Yuen, CTO, Chi-X Japan. “Our
system is fast – the additional risk controls add less than ten microseconds of latency.”

At present, sponsored access is not allowed in Japan.
Brokers are required to conduct reasonable risk checks before their
trades reach the trading venue. But Yuen insists the Chi-X Japan solution does comply
with the existing rules. Users are able to set pre-trade risk controls,
including notional limit, lot size, tradable stock list and max shares,
effectively allowing brokers to set limits on their own flow at the exchange
level.

“These risk controls satisfy the regulatory criteria,
because they are configured by the brokers,” he said. “The hosted risk controls
we are offering allow the brokers to adjust their risk parameters on a daily
basis.”

The Chi-X Japan hosted risk controls could result in cost
savings for sell-side firms. In the US, the ban on naked access introduced in
July last year forced many sell-side firms to implement their own pre-trade
risk controls. According to research firm TABB Group, the cost was significant,
rising from an estimated US$220 million in 2011 to a predicted US$292 million
in 2014. Naked access involves buy-side firms using broker IDs to access
trading venues without any pre-trade risk controls.

Chi-X Japan accounted for 2.09% market share in Japan in
April, down from 2.49% the previous month and 2.65% in January, according to figures from Thomson Reuters Equity Market Share Reporter. As of 23 May,
the PTS is currently on track to hit 2.53% market share this month.